Click here to go back to the Credit Repair main page

Debt-to-income ratio. What is it?

Are you in a financial crisis? If you are unsure, calculating your debt-to-income ratio is a good indication if you need to take action. This ratio is the percentage of your monthly income that is already assigned to debt payments. The lower the better, but most creditors will look for a percentage lower than 36 before they will consider you a good prospect for a loan. The lower your ratio, the lower your interest will be.

Debt-to-income ratio. What is it?

This is not hard to do, but does require you to get some paper, a pen and a calculator.

Figure out your total monthly income that is guaranteed. This includes your monthly salary, any income from rental properties or benefits etc. Once you have a final figure, multiply that by 36%. If your pay cheque fluctuates from month to month, take the average of about 6. Below is an example:

(Monthly salary = $3,500) x 0.36 = $1,260

This is a good way to show how much you should be paying on your current debts. If your monthly obligations are more than this, then you may have problems.

Now you need to figure out your monthly financial obligations. Get your recent credit card statements, and calculate the total minimum monthly payment. Work out your other monthly debts like your rent/mortgage, car loan and personal loans etc. Your house hold expenses like groceries can be left out:

e.g.
Credit card min. payments: $450
Rent/mortgage: $800
Car payment: $350
Monthly Total: $1,600

Now divide your total monthly obligations by your gross income:

1,600 / 3,500 = 0.46 (or 46%)

What does the ratio mean?

• 36% or less: You are handling your debt and everything is in order.
• 37% to 43%: Things are going ok, but try to cut back a little on unnecessary spending to bring the ratio down.
• 44% to 49%: Severe warning sign that unless you act now, major problems will be faced.
• 50% and greater: Professional help should be sought to help tackle your problems and reduce your debt.

My debt-to-income ratio is too high!

Try not to panic. If your ratio is showing warning signs then look to cut back on spending and increase your income anyway possible. Using credit cards should be limited to emergencies, and switch to cash so you can see exactly how much you are spending. We know this is difficult to do, but the longer it is left the harder it will become in the long run.

Look at where you are spending. Do you buy a coffee every morning? Could you make one yourself instead? These little items that you buy on a regular basis soon add up, and if put towards your debt could really help.

If you are concerned at your position, call us today and ask to go through a budget. There are several different ways we can help; from free advice, to debt consolidation programs through debt management.